Government data shows how much our expenses shift as we age

Well, if you turn out to be anything at all like the average 65-plus-year-old American, the bulk of your after-tax money will go toward housing, transportation, food, health care, insurance, and oddly enough, retirement savings including Social Security (if you are still working).

Housing and Health Care Top Expenses

The two you really need to worry about are housing and health care.

Housing, over time, represents an increasingly large portion of your expenses, and unexpected health care expenses could put a big dent in your best-laid retirement plans.

Specifically, this age group spent $13,833, or 34 percent of their after-tax income, on housing; $6,538 on transportation; $5,118 on health care; $5,059 on food; $2,454 on cash contributions; $2,009 on insurance and retirement savings and the rest on various expenses including alcoholic beverages, entertainment and education.

Age Matters

What’s especially interesting about the BLS report is that it breaks down the difference between spending by people ages 65 to 74, or “early-stage” retirees, and those 75 years and older (“late-stage” retirees).

Among the more noteworthy differences: Housing as a share of after-tax income rises seven percentage points, from 32 percent of expenses for those ages 65 to 74 to a stunning 39 percent for those age 75 and older. Health care rises five percentage points, from 11 percent for early-stage retirees to 16 percent for late-stage retirees.

By way of background: in 2012, there were 31 states where at least 30 percent of older households had a significant housing-cost burden — i.e., they paid more than 30 percent of their income toward housing expenses, according to The Financial Security Scorecard: A State-by-State Analysis of Economic Pressures Facing Future Retirees, a report recently published by the National Institute on Retirement Security (NIRS), a nonprofit research group based in Washington, D.C. This reflects a significant increase since 2000, when only 14 states fell into this category.

Meanwhile, some expenses fell as a share of after-tax income from early-stage to late-stage retirement.

For instance, spending on transportation falls four percentage points from 18 percent to 14 percent and spending on insurance and retirement savings falls three percentage points from 6 percent to 3 percent.

Income Falls as Expenses Rise

Part of the reason housing and health care increase as a share of expenses has to do with the income and expense sides of the ledger, as well as changes in the number of people in a household.

According to the BLS report, income falls a whopping 36.7 percent between the early and late stages of retirement, from $53,521 for those 65 to 74 years old to $33,853 for those 75 years and older. But after-tax expenses fall only 27 percent, from $45,968 for early-stage retirees to $33,530 for late-stage retirees.

Part of the reason for the decline in income has to do with changes in the number of people in a household over the course of retirement.

The average number of people in the household drops from 1.8 for those ages 65 to 74 to 1.5 for those ages 75 and over, a 17 percent decrease. Fewer people in the house equals less income, and less income means less money to spend on essential and discretionary expenses.

Ultimately, even though we might spend less in absolute terms on such things as housing and health care in late-stage retirement than in early-stage retirement, those expenses represents a large portion of a shrinking income pie.

Mitigate Unexpected Health Care Expenses

So what do experts make of these trends? Well, partly this: You can use averages to get a sense of how your spending compares to that of the average American. But in the main, averages can be deceiving.

“I think the more interesting story is the one not told by this data,” said Jeff Brown, a professor at the University of Illinois at Urbana-Champaign.

Specifically, if one looks at health care, one can see that it accounts for about 15 percent of income for those ages 75 and up.

“What this does not show is that there is enormous variation around this average, and it is the variation that can cripple retirement-income security,” Brown said. “Some of those older individuals have very low expenses, and others have financially catastrophic expenditures such as for long-term care.”

Look Beyond the Averages

Given that, Brown said, the advice he would offer those trying to read the spending tea leaves would be this: “Retirement planning is not about averages, it is about having a plan that works even in the face of significant uncertainty about income and expenses.”

The best way to handle uncertainty about income and expenses, in his opinion, is through some very basic insurance products.

“The two that lead my list are: one, life-income annuities, to convert wealth into guaranteed lifelong income; and two, long-term-care insurance, to provide protection against major expenses of a nursing home or home health care,” Brown said. “Of course, the latter advice makes the most sense for individuals who have saved and wish to protect their assets. If someone is already 75 years old and has no assets to speak of, then there is very little point insuring against long-term care because the individual would likely qualify for Medicaid.”

Others agree that the BLS report highlights the need for long-term care insurance.

“For some households, long-term care insurance of some sort is worth exploring — especially those who can afford a universal life policy with a long-term care option/rider,” said Doug Short, vice president of research at Advisor Perspectives, a trade publication for advisers.

(Of note, here’s a compelling and detailed visualization of demographic spending that Harry Dent, a financial newsletter writer and author of The Great Depression Ahead, produced in 2011. It shows, according to Short, that expenses for the elderly are very heavily skewed toward medical-related costs.)

Try to Trim Housing Expenses

For his part, Dirk Cotton, who runs JDC Planning, a personal-financial-planning practice in Chapel Hill, N.C., noted average housing expenses decline significantly from the 65-to-74 age group ($15,076) to the 75-and-over age group ($12,298), while the average number of persons in the household declines from 1.8 to 1.5 persons.

“Since we can’t have fractional people except in statistics, it strikes me that averages may not be particularly useful when analyzing housing costs,” said Cotton, who also blogs about retirement at TheRetirementCafe.blogspot.com and is author of Retiring When Your 401(k) Fails. “The costs will either be that for a one-person household or a two-person household and neither may be near the average.”

Still, Cotton said housing costs will likely be the single largest category of expenses. And they represent an opportunity to reduce overall expenses, by downsizing, relocating to an area with lower housing costs, paying off a mortgage or a combination of these.

“As importantly, these actions can reduce ‘lifestyle leverage,’ which increases the risk of outliving one’s retirement savings,” Cotton said. “Portfolio failure rates increase exponentially with spending rates, so small cuts in the annual amount we spend from a retirement portfolio can result in very significant reductions of the risk of depleting our savings. Housing offers an attractive opportunity for cost cutting and risk reduction.”

Robert Powell is a MarketWatch Retirement columnist. He has been a journalist covering personal finance issues for more than 20 years. Follow him on Twitter @RJPIII.